Quick Reaction to Delta Conveyance Benefit-Cost Analysis

Received the B-C analysis about 2 hours ago, and I am getting requests for instant reaction.  Posting here rather than respond to individual messages.  Three quick observations.    

1.  Seismic risk reduction benefits are low.  They are about 2.5% of the project's benefits according to Sunding and quite small relative to costs.  

Sunding's analysis confirms that earthquake risk is not a compelling reason to build the tunnel, a consistent finding over time.  

Can tunnel advocates stop hyping this point.  Even DWR's own analysis shows the tunnel is a lousy way to address earthquakes and flood risk.

2.  The project is all about urban water supply.  It accounts for virtually all the benefits, and urban water agencies (mostly Metropolitan Water District) will be pay the vast majority of costs. 

Urban water agencies, their decision makers and stakeholders need to take a critical eye at these estimates.  The value placed on this urban water seems extremely high.

3. Comparison to 2018 single-tunnel analysis raises questions about whether the benefits are overestimated.  

In 2018, he estimated 850,000 af of annual water yield from a tunnel, and in this analysis is it is 400,000 af.  

In 2018 analysis, urban users valued a larger water supply at $9.9 billion (2018$).

Now, a much smaller amount of water is valued at $33.3 billion to urban users (2023$)

It's a massive increase for less water.

A good chunk of the difference is due to inflation (2023$) and a lower discount rate (2% vs 3%) based on revised federal guidance.  If that 2018 analysis was redone with 2% discount rate and 2023$, that $9.9 billion would nearly double by my back of envelope math, let's call it $20 billion.  So consistency on inflation and discounting covers about half the gap.

But how do we get from $20billion to $33 billion urban water supply value, especially when the new project has a lower increase in water deliveries?  In other words, this report shows 50% more value from 50% less water.  

I will note that the urban water values are based on future urban water demand as estimated in agencies 2020 urban water management plans.  Experience shows those plans consistently overestimate demand growth, and I suspect that piece requires a lot of scrutiny.  He estimates the tunnel will reduce future water shortages in urban areas from 9% to 5%.  However, future urban water shortages are likely to be much lower with an updated or alternative estimate of demand growth.

Please note that this is instant reaction. I have not had time to review carefully.

Questions for the release of the Delta Conveyance benefit-cost analysis

This evening, I learned that the long-awaited benefit-cost analysis for the Delta Conveyance Facility (DCF) is being released tomorrow morning.  DWR put out an FAQ in advance of the release last week, but it didn't include any of the questions below - so perhaps someone who is invited can ask them directly.  Dr. Sunding did these analyses in the 2010s for the WaterFix, including an analysis of a single-tunnel option.  His old analysis of a single-tunnel WaterFix suggests the current single-tunnel DCF would fail his own benefit-cost analysis, as I explained in the past here and here, because the DCF water supply benefits are lower and the costs higher than in 2018.  Perhaps this is why we have had to wait so long for this update, it must take a lot of time and creativity to figure out a way to increase the benefits. (Note: This first paragraph was revised 5/16 9:30 AM, the morning after the original post.)

This report is being released over five years after Governor Newsom directed DWR to switch to a single-tunnel plan, and nearly two years after DWR released the details of its preferred project design in the Draft EIR.  The Final EIR was released last year.  

• Should benefit-cost analysis be conducted before or after an alternative is selected?

When WaterFix considered switching to a single-tunnel, staged implementation, you produced a benefit-cost analysis for a single-tunnel alternative in a few months.  

• Why did it take so long to release this report?  

In your WaterFix benefit-cost analyses in the 2010s, you did not use the same no-tunnel baseline and project description as the EIR, and you did not include any environmental costs.

• In this analysis of the DCF, are you being consistent with the EIR baseline and project description?  

• If not following the EIR.  Why?  

• Does this analysis include environmental costs of the tunnel?

None of the previous analyses you did for the WaterFix were ever submitted to the State Water Board or the Delta Stewardship Council as evidence that the WaterFix was in the public interest.

• Why not?  

• Will this analysis be added to the current petition before the State Board?  

In your WaterFix benefit-cost analysis, you found that expected economic benefits from earthquake risk reduction due to the tunnels were relatively small.

• Are your current findings the same?  If not, why?

• Considering the fatalities, infrastructure and property loss from mass levee failure, is a water tunnel the best way for the State to address this risk?

• Have you done benefit-cost analysis comparing levee investments to a water tunnel to address earthquakes and flood risk?

The Central Valley Project, which was supposed to pay 45% of the cost of WaterFix, has already decided not to participate in the DCF due to cost.  Several agriculture serving State Water Project agencies are also declining to participate due to costs.

• What does your analysis say about whether the remaining agricultural water suppliers can afford their share of the DCF?

• Does your analysis predict that agricultural water agencies will stick with the project, or does it predict that more agricultural water users will drop out of the project?

Metropolitan Water District’s sales have declined in recent years, and population has declined in its service area.  Its 10-year financial projection forecasts rates will increase at 3-times the expected rate of inflation over the next decade with flat or declining water sales.  

• Does your analysis project increasing or decreasing water demand for MWD?

• Have you analyzed its ratepayers and member agencies capacity to pay for the tunnel?

In your other work, you have written a lot about how uncertainty reduces the benefits of investing in a project, including regulatory uncertainty.  There is a lot of uncertainty about how the DCF will be operated, including uncertainty about environmental effects.  Adaptive management is part of the plan.  

• Did you reduce your estimates of benefits to account for uncertainty?

• Did you account for uncertainty in the estimates of cost?

___________________________________________________________________________________

Last week, DWR released an FAQ document that reserved its only call-out for 4 bullet points describing “benefits of the Delta Conveyance Project will not be quantified in the benefit-cost analysis and yet are also compelling for decisions-makers.”  These comments and questions are regarding these four bullet points in the FAQ.  

Groundwater supplies.  In previous studies of WaterFix benefits and costs, Dr. Sunding explicitly accounted for constrained ground water supplies and limits on groundwater pumping, it significantly increased the value of water supplies to farms. It seems likely that DWR’s statement about this in its FAQ is false and these benefits are quantified in the benefit-cost analysis.

• Are constraints on groundwater included in the valuation of water supply benefits?

Job creation.  You have estimated jobs created from tunnel construction, which DWR calls a benefit in its FAQ document describing your report. 

• If the costs increased, wouldn’t the jobs increase too? 

• Have you ever said that jobs are a measure of costs not benefits with respect to benefit-cost analysis?

• If funds were spent on tunnel alternatives instead of DCF, how many jobs would be created? 

• When higher water rates reduce household income, how many jobs are lost?

• For every dollar spent, do tunnel alternatives create more or fewer jobs than the tunnel?

Increased Operational Flexibility:  Like groundwater benefits, this could be included in the benefit estimates for water supply and water quality.  This issue does raise questions about whether DWR intends to actually operate the tunnels as described in the EIR.  Regarding tunnel operations, the EIR states that “Shifting from south Delta intakes to proposed north Delta intakes has trade-offs and is not expected…” 

• Do your benefit estimates reflect flexibility from the project operations in the EIR?

Delta Community Benefits Program:  The program is speculative and undefined.  Funding is expected to be minimal.  Is funding for this undefined program included in the cost estimate? If not, it shouldn’t be mentioned here. 

Income-based Fixed Charge for Electricity? There must be a better way

I support the efforts of lawmakers to put the income-based fixed charge proposal on hold.

I understand the objectives, but it seems to me that income-based fixed charges would have very high administrative costs and the potential for a lot of errors and privacy concerns.  There are other ways to administer a fixed charge, even a progressive one, if that is necessary and desirable.

There are lots of people living in households that are not economic units - roommates and extended family who are multiple taxpaying units with multiple income streams who are on the same electric meter.  There are also some housing units that are not separately metered within a building.  And income varies wildly from year to year and is hard to verify.

It seems you could accomplish most of the same objective in a much simpler way by having a fixed cost that varies by the size of the housing unit (square footage).  While not perfectly correlated with income, variation by size of the unit would still be progressive and much easier to administer.  Square footage is stable from year to year and the information is easy to obtain and verify without being personally intrusive.  

Finally, there is an issue of adding more "means tested" programs that phase-out in the same income bands.  Too many of these well-intentioned programs, usually developed independently, can create high the equivalent of high "marginal tax rates" and benefit "cliffs" for households that can create negative economic incentives and unfair surprises for households. 

Of course, there is a second issue about whether fixed costs make sense at all.  Having a fixed cost on a bill is better aligned with the true cost structure of a utility which includes fixed and variable costs, but recovering all the costs through rates encourage conservation and efficiency from customers.  The incentive for conservation may be secondary to the objective of getting people to switch fuel sources and electrify appliances and vehicles.  Fixed charges that would normally be bad environmentally, may make more sense in that context.